From a macroeconomic viewpoint Illinois is one of the worst-performing U.S. states. A big reason is the high taxes, by U.S. comparison, that drive jobs and businesses to other states. Illinois has raised its taxes more times than I care to count, with a “temporary” income-tax increase in 2011 that (huge surprise) has turned out to be permanent. States neighboring Illinois have been quick to capitalize on The Prairie State’s suicidal tax policy, with some crafty people in Indiana putting up this billboard at the state line:
The image is not mine. It was the thumbnail for a policy paper by the Illinois Policy Institute, a hard-working free-market think tank in Chicago. I chose to borrow it because it illustrates the campaign by Indiana to attract tax-weary Illinoisans. In doing so, Indiana participates in one of the most important economic activities of our time: tax competition. Since there is completely free movement of people and capital across state lines in the United States, the decisions by families and businesses where to reside and work is governed to a relatively large degree by factors such as the tax burden. High-tax states (count Illinois among them) lose jobs and investments to low-tax states.
Politicians who want to build big governments can then sell their welfare states to taxpayers as best they can – if taxpayers prefer to keep more of their own money, and pay for more of their own consumption directly out of their own pocket, then they can choose to do so.
Tax competition fulfills two major purposes. (For an excellent introduction to tax competition, please visit this site over at Center for Freedom and Prosperity.) The first purpose is to keep the free-market sector of the economy alive. When people make decisions to move, look for jobs or invest based in part on differences in taxation, it keeps us as economic agents on alert. We do not slouch on the job, we watch for better opportunities and thereby take responsibility for ourselves and those who depend on us.
The second purpose is to put a cap on the growth, and ideally size, of government. If people can vote with their feet – or money – then government will at some point have to reconsider its plans to expand with yet more tax hikes.
Which explains why there is such widespread contempt for tax competition among lawmakers, both in the United States and in Europe. The latest expression of that contempt comes from (another huge surprise) France, where socialist politicians want to do away with tax competition altogether, at least within the EU. Reports Euractiv:
Paris has long backed the idea of an across-the-board harmonisation of EU member states’ tax systems. According to French government advisors, this must begin by a common tax base for the European banking sector, EurActiv France reports. … Those in favour of harmonisation have a mountain to climb, but have not backed away from the challenge.
Fortunately, there is still a shred of common sense to be shared among some in Europe:
Experts across Europe oppose a common tax system on the basis that competition between tax systems is positive and forces governments to be more efficient.
This, however, has not prevented government expansionists from making the most absurd arguments for abolishing tax competition. Euractiv again:
France has one of the highest levels of income tax in Europe and the government argues that low tax rates prevent the smooth working of the European Common Market. Earlier this year French President François Hollande said he wanted “harmonisation with our largest neighbours by 2020.” In a report titled Tax Harmonisation in Europe: Moving Forward, the [French government's economic advisory council] CAE proposed three ways to tackle the negative effects of fiscal competition.
The very idea that low tax rates prevent “the smooth working” of the free market in the EU is patently absurd. The argument is based on the notion that when tax rates are the same everywhere, businesses make decisions based not on taxes but on “real” business matters. But that notion disregards the fact that government is an active player in the economy, and that its services – while provided inefficiently under a coercion-based monopoly – are like most other services in the economy. I can choose to buy tax-paid services from the New York state government, or from the state of Wyoming, just as I can choose to bank with Warren Federal Credit Union or First Interstate Bank, or to buy my insurance products from Farmers, GEICO or any other insurance company.
Since government is an active player in our economy, it must be subjected to the same free-market conditions as the rest of us, as far as that is possible.
However, as we go back to the Euractiv piece we learn that this is not a concept that European statists are willing to entertain:
The first measure is to continue efforts for a common consolidated corporate tax base (CCCTB). Harmonising tax systems would make “fiscal competition more transparent and healthier,” says Agnès Bénassy-Quéré. According to Alain Trannoy, an economist who co-wrote the report, a CCCTB should be based on “reinforced cooperation or with some countries like Germany, France, the Benelux states and Italy, in order to create a snowball effect in different Eurozone countries.” Harmonising tax bases would also reduce the risks of optimisation, when multinationals transfer their revenues from one country to another in order to benefit from lower corporate tax. “Corporate tax is an important element, but there is no point if tax bases are not harmonised,” said Alain Trannoy.
And now for the three-dollar bill question: once these high-tax EU states succeed in creating a high-tax cartel, what is going to happen with the tax rates?
a) They will go up,
b) They will go up, or
c) They will go up.
You may choose whichever answer you want, so long as your choice is harmonized with the answers you do not choose.
According to the authors, the Banking Union, which was adopted in April, needs to go further in the area of taxation. This can be done with a Single Financial Activity Tax (FAT) in Europe. They also advocate a minimum corporate income tax for the banking sector, the receipts of which should be reinvested into infrastructure and long term investments and “form the first building block of a euro area budget.”
And there you have it. The real purpose behind this is to build yet another level of government spending. While it sounds noble to invest in “infrastructure” and the like, this is, after all Europe. Therefore, it is a safe bet to foresee that if this new level of government were ever to be created, its spending would go primarily toward yet more entitlement programs in an even more complex welfare state. Let’s keep in mind that there are already politicians on the left flank of European politics who are pushing hard for harmonized entitlement programs across the EU. What better venue for that harmonization than a full-fledged, EU-level welfare state?
And as we all immediately understand, the world’s largest welfare state, which has not solved all the alleged problems of inequality and poverty it was created to solve, must therefore obviously become a lot bigger.
Out there, on the outer left rim of unabridged statism, the question “when is government big enough?” simply does not have an answer. With the next EU Commissioner for Economic Affairs likely being a socialist, this unanswered question is going to have serious consequences for Europe. Its current journey into industrial poverty, paved by the world’s most sloth-inducing entitlement systems and fueled by the world’s highest taxes, apparently is not going fast enough.
In last week’s elections, did Europe’s voters plant the seeds of a post-EU Europe? The question has surfaced in response to the strong showing of Euroskeptics and outright anti-EU parties across the continent. While most observers of European politics are still at loss trying to comprehend the fact that some of their fellow citizens actually don’t like the EU, some sharp-minded analysts see the writing on the wall for what it actually is. In addition to Yours Truly, you can always trust Daily Telegraph columnist Ambrose Evans-Pritchard. Again, he has elevated himself above the murmur. Starting with Britain, he gradually expands his perspective, laying out a credible scenario for Europe’s future:
If Europe’s policy elites could not quite believe it before, they must now know beyond much doubt that they have lost Britain. This island is no longer part of the European project in any meaningful sense. British defenders of the status quo were knouted on Sunday. UKIP won 27.5pc of the vote … Margaret Thatcher’s Tory children are scarcely more friendly to the EU enterprise.
This is an important observation. The British vote shows two things: first, that British democracy, unlike continental Europe’s, still has not succumbed to Europhoristic centralism – on the contrary, Brits still believe in their traditions and their way of governing themselves; secondly, classical Anglo-Saxian liberalism still has a voice in Britain.
The second point carries more weight than perhaps even the Brits themselves realize. Deep down, UKIP’s ideology is a mild version of what we here in America refer to as “libertarianism”, namely a solid refutation of all government beyond a small set of strictly contained and enumerated core functions. A UKIP prime minister would never pursue the termination of the British welfare state, but he would most likely revive some of Thatcher’s legacy, a legacy that has been carefully squandered by the Conservatives.
Britain needs more Thatcherism. Europe could use a big dose of it as well. Hopefully, an invigorated UKIP can deliver that, with the right cooperation in the European Parliament.
Back to Evans-Pritchard:
Britain’s decision to stay out of monetary union at Maastricht sowed the seeds of separation, as pro-Europeans fully understood at the time, though almost nobody expected EMU officialdom to clinch the argument so emphatically by running the currency bloc into the ground with 1930s Gold Standard policies and youth unemployment levels above 50pc in Spain and Greece, and above 40pc in Italy. European leaders must henceforth calculate that the British people will vote to leave the EU altogether unless offered an entirely new dispensation: tariff-free access to the single market along the lines already enjoyed by Turkey or Tunisia; and deliverance from half the Acquis Communautaire, that 170,000-page edifice of directives and regulations that drains away sovereignty, and is never repealed.
In a nutshell, Evans-Pritchard is saying that the euro was doomed without Britain’s participation – a statement that is only partially correct. The structural imbalance of the euro project goes deeper than that. But more on that later. Evans-Pritchard refers to reckless austerity policies as having removed the fiscal and, especially, monetary policy foundations for a sound, strong common currency. He is right about austerity, as regular readers of this blog know; the Liberty Bullhorn contains more analysis of Europe’s austerity policies and their consequences than any other website in the world.
But even if we disregard the structural imbalances built into the euro project, it is important to note that the ECB has exacerbated the crisis by frivolously printing money right, left, up and down to save credit-crashing welfare states from fiscal ruin. If there is one single policy move that really drove the pole through the heart of the euro, it was the ECB’s decision to bail out its worst-rated welfare states. That open-ended commitment to print money reduced the euro from Deutsch Mark status to something of a business-class Drakhma.
Evans-Pritchard also makes a note of the ever-growing regulatory burden on EU’s member states. In this category, the EU is competing with the Obama administration, though in the latter case things have slowed down considerably in the last couple of years. Also, it is increasingly likely that the next president of the United States will have libertarian roots – probably stronger than those of UKIP leader Nigel Farage – which will vouch for a historic regulatory rollback. For that to happen in Britain, the country has to leave the EU.
Which, again, is probably going to happen in the next few years. Now for the broader perspective, and Evans-Pritchard’s analysis of where France is heading:
It is a fair bet that EU leaders would search for an amicable formula, letting Britain go its own way while remaining a semi-detached or merely titular member of the EU. Let us call it the Holy Roman Empire solution. Yet Britain is the least of their problems. The much greater shock is the “Seisme” in France, as Le Figaro calls it, where Marine Le Pen’s Front National swept 73 electoral departments, while President Francois Hollande’s socialists were reduced to two. … It is widely claimed that the Front is eurosceptic only on the surface. Perhaps, but when I asked Mrs. Le Pen what she would do no her first day in office if she ever reached the Elysee Palace, her reply was trenchant. She would instruct the French Treasury to draft plans for the immediate restoration of the franc… She vowed to confront Europe’s leaders with a stark choice at their first meeting: either to work with France for a “sortie concertee” or coordinated EMU break-up, or resist and let “financial Armageddon” run its course. … She said there can be no compromise with monetary union, deeming it impossible to remain a self-governing nation within the structures of EMU, and impossible to carry out the reflation policies necessary to defeat the economic slump.
Given that the Front National has suffered no notable setback in national voter support over the past decade, but instead gradually grown stronger, the prospect of a Madame President Le Pen is one that both Europe and the United States should get used to. Therefore, as Evans-Pritchard rightly explains, it is also time to get used to the prospect of Europe returning to national currencies.
The one point in this that I disagree with is that reflation is the way out of the recession. More on that in a moment. First, one more point from Evans-Pritchard, this one about the future of the euro with rising Euro-skepticism among voters:
The euro will inevitably lurch from crisis to crisis without some form of fiscal union and debt pooling. Yet voters have just let forth a primordial scream against any further transfers of power.
Indeed. So long as there is any form of government involved in the economy, there has to be a fiscal policy tied to that currency. Furthermore, so long as there is a welfare state there will be government deficits, either in recessions or on a structural basis as has been the case in Europe and the United States for decades now. Such deficits will be denominated in a currency, and that currency has to be the same that the government accepts for, e.g., tax payments, as well as the same currency that they use to pay out entitlements. In other words, there has to be a jurisdictional overlap between a currency and a fiscal government, or else the currency inevitably becomes unstable.
Some of these points were made by economists, among them Robert Mundell, already 15 years ago, before the euro was minted. However, they were drowned out by the Europhoria that dominated most of the ’90s in Europe, leaving the continent with a fundamentally unsustainable imbalance between monetary and fiscal policy.
So long as national government deficits were of manageable levels the imbalance did not have any notable political or macroeconomic consequences. As I describe in my forthcoming book Industrial Poverty, this was the case between the Millennium and Great Recessions. However, as soon as budgetary sink holes opened up around Europe from 2008 and on, the imbalance became a true problem.
The full explanation of this requires an intricate but fascinating macroeconomic analysis. I am working on it separately, hoping to share it later this year. In the meantime, let’s acknowledge that Evans-Pritchard hits it right on the nail: the mounting voter resistance to more EU power is a game changer for both the EU and the future of the euro currency. What is missing from his column is the right economic conclusion, namely that dismantling the welfare state – not reflation – is the way forward for Europe. But that is a minor point. Do take a moment and read the rest of his entertaining yet sharply analytical column.
As the dust settles on the elections to the European Parliament, a somewhat schizophrenic conclusion is emerging:
- on the one hand voters expressed their skepticism toward the EU project and rejected, overall, the notion of a continuous, business-as-usual expansion of the EU into a new, gigantic government bureaucracy;
- on the other hand the rejection of even bigger government was partly expressed in a form that, absurdly enough, may very well pave the way for another, even uglier form of government expansion.
The outcome of the election is more dramatic than most media outlets have yet realized. Put bluntly, this election was a loss for European parliamentary democracy and a gain for authoritarianism of a kind Europe has not suffered from for a quarter century now. But as painful as it is to acknowledge, the real winners of this election were communists and aggressive nationalists – also known as fascists.
There is no mistaking the outcome: voters spoke, and numbers changed in the European Parliament. Political parties with a traditional commitment to parliamentary democracy lost dramatically, with conservatives and liberals losing more than one fifth of their seats. At the same time, communists and radical socialists of assorted flavors increased their parliamentary presence by one third.
Add to those gains the big inroads made by aggressive nationalists and fascists.
Europe’s political elite may want to ignore this, but the most dangerous reaction to this election would be to turn a blind eye to what voters did: they passed power out from the democratic center to the outer rim of the political spectrum. There, communists and fascists stood ready to scoop up voters who are deeply dissatisfied with, well, just about everything from unemployment and economic stagnation to immigration and “inequality”.
Europe is now at a fork in the road, one that will decide the fate of a continent that is home to half-a-billion people. But before we get there, let us take a look at what actually happened in the election.
Communist parties did well, especially in southern Europe where the Great Recession has done its biggest damage. In Greece, the radical leftist party Syriza, which sees Hugo Chavez’ Venezuela as a political role model, took 26 percent of the vote and became the largest Greek party in the EU Parliament. In Italy, incumbent prime minister Renzi’s leftist Democratic Party got 40 percent of the vote. Portugal’s old communist party, rebranded as socialists, came in first with 31.5 percent of the vote. In Spain, a radical socialist coalition took ten percent of the votes, placing them third in the election.
But it was not just in southern Europe that communists, old or new, did well. Ireland’s scary-left and historically terrorist-affiliated Sinn Fein got a frighteningly large 17 percent of the votes.
Sweden is an example of how refurbished communists have shown remarkable resiliency in the past two decades. Their radical left is split among three parties, which taken together is more than the country’s traditionally dominant social democrats got. The three radical leftist parties are: the Greens (15.3 percent of the vote), the renovated-communist Leftist Party (6.3) and the new, aggressively socialist Feminist Initiative (5.3).
Altogether, the entire leftist spectrum – from vanilla-favored social democrats to hardline Chavista leftists – held their lines in the European Parliament, in the face of stiff competition. But as indicated by the above mentioned examples, the radical flank within the leftist block made big advancements. Their European Parliament group, called GUE/NGL, increased its number of seats by one third. This number could increase even more when some small, new parties from across the EU choose affiliation.
The underlying message in the shift toward the hard left is that Europe’s voters – already living under the biggest governments in the free world – have forgotten what happens when government grows beyond the boundaries traditionally respected in Western Europe. Perhaps the most conspicuous signal of Europe’s communist amnesia is embedded in the seven percent voter share that Die Linke got in Germany. They are the old Socialist Unity Party, in other words the party that ruled East Germany with an iron fist and back-up from Soviet tanks throughout the Cold War. Die Linke is fiercely anti-capitalist and shares Syriza’s adoration for what Hugo Chavez did to Venezuela.
The fact that Die Linke only got 7.4 percent should be considered in the context of the fact that Germany’s Green Party captured 10.7 percent of the votes. This puts the radical left in Germany at 18.1 percent, a share that grows even more in view of the fact that the SPD, the social democrats, are now parked at a lowly 27 percent voter share. If the social democrats in Germany continue to decline, the combined voter share of the Green Party and the old East German communists could easily exceed 25 percent in the next German national elections.
A surging radical left in the European Parliament will have profound consequences for European politics, but it will also affect Europe’s relations to the United States. More on that in a moment. First, let us take a look at the other flank of the authoritarian lowland.
Known under its less sophisticated label “fascism”, authoritarian nationalists made frightening advancements in the election. Most notorious, of course, is the victory in France for Front National under Marine Le Pen’s stewardship. Her polished version of the party her father founded won a stunning 25.4 percent of the vote, putting them decisively ahead of the nearest competition.
Ten years ago, Front National was little more than a punch line in a political joke. Yes, Jean-Marie Le Pen technically came in second in a presidential run-off against incumbent Jacques Chirac, but the entire campaign was of the same kind as if the Democrats had put up Ralph Nader against George W Bush in 2004. (No other comparison intended between Nader and Le Pen, of course.) Today, Front National is at a point where their leader can confidently demand that President Hollande dissolve the national parliament for new elections. That is not going to happen, but the demand sent shivers through the French political establishment.
It should. Marine Le Pen is no longer just a French political contender – she is in fact not just the leader of what is currently the largest political party in France. She is emerging as the leader of a new, bold, aggressive nationalist movement in Europe. Her party group in the European Parliament will incorporate outspoken fascists such as Hungarian Jobbik (which came in second in Hungary and apparently has its own uniformed party corps). Some media reports state that Front National and Jobbik are already in talks with each other on how to cooperate in the European Parliament.
Another of Le Pen’s new friends is Golden Dawn, which in the European election confirmed its position as Greece’s third largest party. Despite extensive legal challenges and elected officials of the party currently being incarcerated, Golden Dawn refuses to go away. More than likely, their strong support among police and the military will be enough to let them return, emboldened and empowered, to both the Greek and the European political scene.
With Front National, Jobbik and Golden Dawn as their pillars, the aggressive nationalist party group in the European Parliament could indeed turn out to be a vehicle for the rebirth of European fascism. The deciding factor will be where Europe’s rapidly rising patriotic parties will land. This is a different breed than the aggressive nationalists, consisting of Euro-skeptic parties, best exemplified by Britain’s UKIP. There is now a whole range of parties in Europe that fall into this category, such as PVV in the Netherlands, Danish People’s Party, Swedish Democrats, True Finns, Alternative for Germany and Austria’s People’s Party.
Some of these parties did remarkably well: both UKIP and the Danish People’s Party won their countries’ respective European Parliament elections. The Swedish Democrats scored almost ten percent of the votes, double what they got in the national elections in 2010. Alternative for Germany surprised many by capturing as much as seven percent of the votes, while there was disappointment among PVV supporters in the Netherlands as their party only got 13 percent and a third place.
It is not an exaggeration to say that this new group of patriotic parties holds Europe’s fate in their hands. Their ideological foundation spans from “basically libertarian” as Nigel Farage once called UKIP to welfare-statist Swedish Democrats. But they all have in common that they are committed to traditional, European parliamentary principles. This sets them apart from the aggressive nationalists whose political visions do not exclude a new full-scale fascist experiment.
If some of the patriotic parties are lured into cooperation with Front National, Jobbik and Syriza, there is a significant risk that Europe, within the next five years, will see a continent-wide fascist movement. There are other aggressive nationalist parties lurking in the political backwoods, ready to capitalize on voter disgruntlement with existing political options. Among those, Germany’s National Democratic Party, NDP, actually captured on seat in the European Parliament this time around.
With the history of Front National in mind, only imagination sets boundaries to what the NPD can accomplish.
Another example is the Party of the Swedes. Originally called the National Socialist Front and merged with violence-prone Swedish Resistance Movement, the Party of the Swedes is waiting for the patriotic, parliamentarian Swedish Democrats to fail to deliver on their voters’ Euro-skepticism. While waiting, Party of the Swedes is gaining parliamentary skills at the local level around Sweden. That experience can then be used in a run for national office – and eventually to reach for the European Parliament.
While fundamentally anti-democratic movements gained ground, the surge of democratic, patriotic parties is the only silver lining in this European Parliament election. This group is still small compared to the traditional center-right parties known under their acronyms EPP (center-right) and ALDE (center-liberal). But these democratic, patriotic parties hold the map in their hands to Europe’s future. If the EPP and ALDE choose to cooperate with them, then Europe will choose the stable, democratic road to the future.
If, on the other hand, the Europhiles in EPP and ALDE continue to ignore the growing, sound, democratic version of Euro-skepticism, and instead charge ahead with their project of a grand European Super-Union, the voter reaction will be fierce and potentially catastrophic. At that point, voters will seek other, much less palatable outlets for their skepticism or outright resistance to the European project.
If leaders of Europe’s conservatives, liberals and social democrats do not pay attention to what actually happened in this European election, they will do Golden Dawn, Jobbik, NPD and Front National a service they will regret for the rest of their lives.
It does not matter if Marine Le Pen is a fascist or an aggressive nationalist. Her surge to pan-European prominence has uncorked a bottle where black-shirted genies have been locked away for decades. History has shown how relentlessly those genies can intoxicate cadres of voters and how viciously they can tear down the institutions of parliamentary democracy.
Europe is playing with fire. The only thing that stands between the torch of fascism, lit up in this election, and a pan-European bonfire is the skill and insightfulness of a small group of Europhile politicians and bureaucrats in the hallways of power in Brussels. So far the leaders of EPP and ALDE, as well as the European Commission, have thoroughly ignored the rise of Euro-skepticism around the continent. So far they have been completely tone deaf to widespread popular frustration with the EU project.
Hopefully, they will come around and start listening to their critics. Hopefully they will let Nigel Farage be the recognized voice of Euro-criticism. But time is running out. If nothing decisively happens soon, the same trend that was set in this election will begin to show up in national elections.
In 2017, the Palais de l’Elysee could have a new tenant – Marine Le Pen.
Never bark at the Big Dog. The Big Dog is always right.
As expected, the harsh reality of the European economy is beginning to sink in with the political leaders of the EU. For a while, the narrative has been that the European economy is rebounding and that unemployment is falling. I have maintained all along that there are no signs of any such recovery, and on Friday Eurostat released a report that begins to backtrack from the unwarranted optimism. However, as the EU Observer reports, the narrative has changed somewhat, now putting focus on differences between member states rather than the absence of any downward trend across the EU:
Figures released on Friday (2 May) by the EU’s statistical office, Eurostat, indicate large differences remain in unemployment rates across member states. The eurozone unemployment rate was 11.8% in March 2014, stable since December 2013, but down from 12.0% in March 2013 With an 11.8 percent overall jobless rate in the eurozone, the chances of people landing a job remain low in countries like Greece and Spain when compared to Austria and Germany. At 26.7 percent, austerity-hit Greece still has the worst unemployment rate in the EU, followed closely by Spain with 25.3 percent. Austria at 4.9 percent and Germany at 5.1 percent have the lowest.
There is a good reason why the new story in Europe is about differences between member states rather than the overall trend. Figure 1 reports quarterly data on total unemployment, not seasonally adjusted, for the EU as a whole and for the euro zone specifically:
Yes, there are differences between member states, but the differences become pointless of there is no overall positive trend in unemployment. Germany is a good example, with an unemployment rate at 5.5 percent in the first quarter of 2014. While this is low by European standards, it is important to note that there is no strong downward trend in these numbers. Yes, measured over the same quarter a year before (e.g., first quarter of 2014 compared to first quarter of 2013) the Germans do see a slow, weak but nevertheless visible improvement. However, the rate still fluctuates from quarter to quarter by as much as a half percentage point, showing somewhat of a weakness in the trend.
Figure 2 highlights further the lack of trend in unemployment:
Most notably, Greece and Italy have not yet reported full data for the first quarter of this year. So far their trends point steady upward, though numbers that I reported previously on the Greek GDP give us reason to believe that unemployment will be flat in early 2014. Italy is a more uncertain case, partly due to growing talks about the country leaving the euro.
It is positive, no doubt, that both Spain and Ireland saw a decline in unemployment in the first quarter of 2014 (the second quarter in a row for Ireland with a decline). However, at the same time French unemployment is steadily on the rise, a fact that, given the size of the French economy, will have hampering effects on any possible recovery in other euro-area countries.
As we return to the EU Observer story, we can hear the frustration echo through the EU head quarters:
EU social affairs commissioner Laszlo Andor called for more investment into job creation. “The ultimate factor that will determine Europe’s economic future is whether we can hold together and further strengthen our Economic and Monetary Union, or whether we let weaker members of the EU and of our societies drift away,” he said. Earlier this year, Andor warned that one in four Europeans is at risk of poverty, despite unemployment figures dropping in some member states. Young people are the worst affected by the unemployment crisis. Only around one in four people of working age under 25 have a job. To offset the trend, the EU last summer launched its Youth Guarantee scheme with a promise to help the young find jobs, continue their education, or land a traineeship within four months of becoming unemployed or leaving formal education. EU money to support the scheme is primarily sourced from the European Social Fund (ESF).
Which is built by, and maintained by, Europe’s taxpayers. Instead of doing something about the high taxes and other factors that prevent Europe’s entrepreneurs from creating jobs, the EU taxes people more so it can give money to the young men and women who cannot get jobs because of the high taxes.
Of course, as the EU Observer story continues, spending taxpayers’ money to create jobs is about as hopeless a project as trying to ride a bicycle in zero gravity:
But given the scale of the problem, the EU plan has been criticised for being underfunded and lacking in ambition. The Brussels-based European Youth Forum in a study out in April on ten member states says the scheme has yet to live up to its promises. “It is a good way of tackling youth unemployment but effectively so far there hasn’t been enough ambition in it and enough political will in some member states to implement it properly,” said a European Youth Forum spokesperson.
Wrong. The reason why it has not yet been successful is because it is a government program, spending taxpayers’ money when taxpayers should really be allowed to keep their money and spend it as they see fit. Because of the high taxes across Europe, only countries with strong exports industries are able to pull ahead (Germany and Austria are good examples). Until government rolls back its presence in the economy – on both the spending side and the taxation side – Europe will be stuck with its disastrously high unemployment levels. Temporary changes up or down will not make any difference over time.
What is the difference between a turtle and the European economy? The turtle is moving fast forward. There are no lights in the tunnel either, especially when we take into consideration the situation in the big French economy. The socialist government came into power on promises to get the economy going, turn the tide on employment and get the austerity dementors from Brussels off the back of the French people. They have not delivered on a single one of their promises, and even though it takes time for new economic policies to sink in, the French socialist government is closing in on two years in office and should at least be able to produce some credible signs of recovery. But that is not the case. On the contrary, whatever blip on the radar they have been able to produce is succumbing under their tax increases and even more stifling regulatory incursions into the private sector:
The rather tepid growth record of the French economy is having a real impact on its government’s relations to Brussels. With the tax base (GDP) barely growing at half a percent per year, it is arithmetically impossible for the government in Paris to close its budget gap. As a result, Euractiv.co, reports:
France is again seeking an extension from the EU on the deadline to reduce its national deficit. European Parliament President Martin Schulz supports the idea but the German government is insisting on adherence to the guidelines of the European Stability Pact. EurActiv Germany reports. In a speech earlier this week, French President François Hollande made it clear he would attempt to renegotiate Brussels’ demands to reduce the French deficit to under 3% of GDP by 2015. The new finance minister, Michel Sapin, also intends to renegotiate the timeline with the European Commission. “The government will have to convince Europe that France’s contribution to competitiveness, to growth, must be taken into account with respect to our commitments,” Holland said on 31 March. But the EU has already given the country two extra years to comply with the Stability Pact’s deficit limit of 3% of GDP.
This is raising tensions over the Stability and Growth Pact, effectively the legal deficit-cap instrument in the EU constitution:
On Thursday (3 April) in Frankfurt, ECB President Mario Draghi again stressed how important it was for eurozone countries to honour their fiscal commitments within the EU. On Friday morning, European Parliament (EP) President Martin Schulz, spoke in favour of meeting French demands. Schulz is the European Socialists’ candidate in the upcoming European elections. Speaking on BFM-TV in France, he said the country must be given more time to comply with the Maastricht criteria. The rules of the Stability and Growth Pact, with its debt limit of 3% must “be reconsidered”, said Schulz. Norbert Barthle is Bundestag spokesman on budgetary policy for Merkel’s Christian Democratic Union (CDU). In his view, another postponement of the deadline should only take place under clear conditions which state that France will really put its budget back on course. The chairman of the Bavarian Christian Social Union (CSU) political group in the EP, Markus Ferber strongly criticised Schulz’s demands to soften the terms of the Stability and Growth Pact: “While the CDU and the CSU have been acting as a fire brigade to extinguish the euro debt-crisis, Martin Schulz is adding new fuel to the growing fire.”
Schulz is the socialist candidate for president of the EU Commission, with a strong statist agenda in his hand. His desire to water down the Stability and Growth Pact has nothing to do with concern for the French economy – it is primarily motivated by a desire to give government the room to grow without any real limits.
Secondarily, Schulz is vehemently against the austerity policies that the EU-ECB-IMF troika has been forcing on some EU states. I share his resistance, but for entirely different reasons. While Schulz sees austerity as an impediment on government growth, I view it – or at least its European iteration – as a macroeconomic poison pill. It is a good idea to stop austerity policies, but the replacement should absolutely not be more government. The French government is way too big, but this is also the case in Europe in general – which is why there is no recovery in sight. On the contrary, stagnation is the new normal. In the last quarter of 2013, industry activity in the EU-28 and euro-18 areas were as follows in key sectors, measured in gross value added (one of three ways of measuring GDP):
- Manufacturing grew 1.7 percent over the same quarter in 2012; 1.3 percent in the euro area;
- Construction declined 0.4 percent, the 11th quarter in a row with declining activity in this sector; in the euro area the decline was 1.7 percent, the 22nd negative quarter in a row!
- Finance and insurance contracted 0.9 percent in EU-28, 1.1 percent in euro-18.
Measured as employment, the numbers do not look better:
- Manufacturing employment contracted 0.7 percent in the fourth quarter of 2013, the eighth straight quarter with a decline; the decline was 1.2 percent in euro-18;
- Construction saw employment shrink by 1.4 percent, the 22nd straight negative quarter; the decline was a notable 2.9 percent in euro-18, marking the 23rd quarter in a row with declining construction employment;
- The financial-insurance industry basically stood still at +0.1 percent (-0.3 percent in euro-18).
(All numbers are from Eurostat.)
Things may turn around when we get the numbers from Q1 of 2014, but I see no substantial reason to expect a sustained recovery. On the contrary, everything points to continued stagnation, in France as well as in Europe. This does not bode well for the future of the continent – perhaps the EuropeanS should get used to scenes like this one:
This past weekend the French went to the ballot boxes in local elections. Recent pan-European polling has indicated that the socialists could become the largest group in the European Parliament, and that may very well happen. But if Sunday’s French local elections are any indication of what French voters think, perhaps the socialists in general should not get their hopes up too much. They were dealt a very serious blow by the electorate – and to make the defeat even more humiliating, the winners were of another, competing authoritarian brand:
The far-Right Front National (FN) was on course on Sunday night to make historic gains in France’s first nationwide elections since François Hollande became president. In what Marine Le Pen, the FN leader, described as a “breakthrough” and the “end of bipolarisation” of French politics, her party came out ahead in a string of French towns in the first round of municipal elections. The FN won an outright majority in the northern town of Henin-Beaumont and was first-placed in the eastern town of Forbach and the southern towns of Avignon, Perpignan and Béziers.
At the same time, the Telegraph reports, the socialist party…
was heading for heavy losses as voters appeared to punish his dithering and lack of results two years into his five-year mandate. These could trigger a re-shuffle of his cabinet, potentially seeing Ségolène Royal, his former partner and mother of four children, take up a ministerial post. … Almost 45 million French took to the ballot box to elect more than 36,000 mayors for the next six years in what was being seen as a test for the Socialist president, whose approval ratings have sunk below 20 per cent. While municipal elections are fought above all on local issues, disaffection with the main parties clearly bolstered the score of the anti-immigration, anti-EU Front National in the two-round contest.
The nationalists are the only political movement in Europe that can compete with the socialists in terms of authoritarianism. They are a less homogeneous crowd compared to the socialists, in part because Europe – at least right now – does not have that many strong outright communist parties. A notable exception is Syriza which essentially wants to turn Greece into a European version of Venezuela. However, the main reason for this is not that voters in Europe in general have turned their backs on collectivism – it is more a matter of socialists having pushed their ideological goals farther into the murky badlands of government expansionism. In some countries, like Italy, Portugal and Sweden, it is difficult to separate socialists from communists.
Alas, while the socialists are pretty well united around goals such as an even bigger welfare state, even more income redistribution and even more government interference with private businesses (and in some cases the nationalization of banks), the nationalists span a broader spectrum of views and visions. The “mild” version of the welfare state is represented by the Swedish Democrats and the Danish People’s Party in Scandinavia, the Pim Fortuyn List in the Netherlands and the Austrian People’s Party. A bit farther away are Vlaams Belang in Belgium, a separatist, nationalist party that basically wants to split Belgium in half and form an independent Flemish republic. Hungary’s ruling nationalists also belong in this category, as does Front National in France.
So far, the nationalists are essentially modern versions of reborn social-democrat parties from the 1920s and ’30s. Vigorously nationalist as those parties were, they drew a firm demarcation line between themselves and working-class imperialist communist parties of that time. The nationalism of the social-democrat movements were skillfully toned down and eventually removed after World War II and the atrocities committed by the National Socialists in Germany, leaving a vacuum that became even more glaring as Europe – in the middle of its long-term unemployment crisis – opened their doors to large scores of non-European, non-Christian immigrants.
Nationalists began alleging, in some instances correctly, that immigrants came and took jobs from Europe’s own young. They also alleged, even more correctly, that large segments of the immigrant population ended up living well off the welfare state. While the correct conclusion would have been to abolish the welfare state and respect each individual’s right to migrate if he can support himself, the nationalist conclusion was to reduce or even stop entirely any new immigration from outside the EU.
In some cases this sentiment has escalated to yet another level. Golden Dawn in Greece represents its most aggressive iteration, but the National Democrat Party in Germany are not far behind. In Sweden, the Party of the Swedes is capitalizing on rising but misguided frustration over high unemployment – especially among the young – and large immigration. Having their roots in now-defunct the National Socialist Front, the Party of the Swedes is not ashamed of calling for a fascist Sweden.
Some claim that this the outermost extreme of Europe’s new nationalist movement is out to build a unified, European fascist state. I would not be surprised if they are correct, but so far I have not found fully credible sources for this claim. Nevertheless, such an ambition goes well with traditional fascist ideology and would explain their keen interest in gaining a strong foothold in the EU parliament.
The big tragedy in all this is not that one of two collectivist, authoritarian flanks are competing for political power in Europe. The big tragedy is that less-collectivist segments of the European political spectrum are slowly imploding. Christian Democrats, Conservatives and Liberals have all been passionately pro-EU for decades, and now that the EU has basically turned into a power-grabbing behemoth voters quickly associate the power grab and the destruction of large parts of the European economy with the most EU-friendly parties. When they are now pushed to the edge of their own economic existence, and when they feel that their national governments are basically powerless vs. the EU, millions of voters turn to radical parties to find a “quick fix”.
Does this mean Europe’s fascism has been reborn? Eric Draitser over at the Boiling Frogs Blog seems to think so. He draws parallels between the nationalist movement in Ukraine and Syriza in Greece. I do not completely agree with him – I do not yet see a fully coherent fascist movement across Europe – but his article is well worth a read. I do agree that there is a dark shadow rising over Europe; the big question is just how big and ominous that shadow will become. And there is absolutely no doubt that it is growing, as shown in part by the very strong performance of Front National in France this past weekend.
Recently I have reported how Europe’s troubles continue, now in the form of deflation and rising poverty. But unemployment is still a major issue; recent signs of plateauing or even a minor decline in joblessness are indicators of stagnation rather than a recovery under way.
Today I can report yet more evidence that Europe’s crisis is continuing. From Euractiv:
One of French President François Hollande’s ambitions is to put in place social and fiscal convergence between his country and Germany, but for now the two economies are taking opposite turns. The number of unemployed people looking for a job has increased by 0.3% in France, which marks the president’s failure to decrease unemployment by the end of 2013. According to official figures published by the Labour Ministry this week, people without any activity (known as category A) have reached a record high number of over 3 million. Categories B and C (persons who have a slower activity) has increased by 0.5 to reach 4,898,100 in continental France and over 5 million including the overseas territories.
It is difficult to give “slower activity” a statistically meaningful definition. However, there are some ways to measure it, and as Eurostat has shown there is a widespread problem in Europe with people not getting full-time jobs. Part of the reason, especially in the French case, is the incredible rigidity of their hire-and-fire laws. But on top of that there is also the problem with unending austerity – aimed at saving the welfare state when tax revenues decline – which depresses overall economic activity. So long as European austerity continues there can be no recovery in private-sector activity. As a result, the French government will fail miserably in its attempts to put the economy back on a growth track again. This failure includes the so called “responsibility pact” that the socialist government came up with last year. Euractiv again:
These figures were published on the day when Prime Minister Jean Marc Ayrault was meeting with employers’ and trade unions’ organisations to launch the “responsibility pact” announced by the president and which looks to reduce employers’ contributions in exchange for commitments for more job creation.
Long story short, the French government is doing practically everything wrong. That includes trying to take advice from its German neighbor. Back to Euractiv (and a poorly written part of the article):
The situation is Germany is radically different. At the beginning of January, Germany unveiled that after four months of rising unemployment, figures fell by 15,000 to 2965 million [sic!] in December in seasonally adjusted (SA) data, according to the Federal Labour Office. The unemployment rate remained stable at 0.9%, [sic!] close to its lowest level since 1990, after a peak in 2011. In absolute numbers the job seekers, however, increased by 2.87 million against 2.80 million in November and the unemployment rate reached 6.7% against 6.5%.
Obviously, Germany does not have 2,965 million unemployed – the article meant to say 2.965 million. Also, the German unemployment rate is not 0.9 percent… The latest monthly Eurostat figure, from November 2013, is a seasonally adjusted 5.2 percent. This is still low, and less than half of the EU average. But the trend is no longer downward, and there is a good reason for that. Consider the following national accounts numbers for the German economy, reported in fixed prices:
The Gross exports numbers explain why the German economy has been so good at producing jobs recently. But as the number for 2013 shows, that boom is tapering off. In order to keep growing, the German economy would need the domestic, private sector to take over. The only way this could happen is if private consumption went into high gear, obviously has not happened. Over the seven years reported here, German private consumption has exceeded two percent growth in one year only, namely the second year of the fabulous export boom of 2010-11. With consumption growing at less than one percent, and the export boom coming to an end, it is safe to say that the German economy will not continue to push down its unemployment rate. Not surprisingly, GDP growth is now below one percent for the second year in a row, with a declining trend.
These numbers from Germany verify that the European economy completely lacks ability to grow on its own. The reason, again, is the depressing campaign to save fiscally doomed welfare states in the midst of a recession. If Europe’s political leaders had the courage – as well as moral conviction and economic insight – to let go of the delusion of a big, redistributive government, then Europe would quickly rise to once again become an engine in the global economy.
Until that happens, Europe’s fate is the same as that of other formerly great industrial nations, such as Argentina. However, because of the extreme rigidity of European politics I fear that the economic wasteland opening up in Europe will have consequences that reach even farther than the decline and fall of one of Latin America’s economic powers.
The deep, persistent European economic crisis is continuing. A few days ago I showed how – predictably – the Greek government is increasing its debt at almost the same rate as before the partial debt default in early 2012. Another sign of the relentlessness of the crisis is that it is slowly but inevitably penetrating the French economy. One symptom is a steadfast increase in unemployment. Here are the latest quarterly data from Eurostat (since this is quarterly data we use seasonally adjusted numbers):
The steady uptick in unemployment coincides to some degree with the socialist government’s deep desire to draw every drip of blood they can from France’s already struggling taxpayers. That policy has backfired, but that does not mean the French government is going to turn to more job-creating policies any time soon.
On the contrary, precisely because of the rising unemployment there is tremendous pressure on the government budget. This pressure has led the EU to express major deficit concerns, and after some batting back and forth between Paris and Brussels the French government has now decided to do exactly what the Eurocrats are asking for. The EU Observer reports:
France’s budget plans are “responsible and prudent” Olli Rehn said Wednesday (26 September) in a sign of rapprochement between the EU and the eurozone’s second largest economy. Speaking to reporters in Brussels following talks with French finance minister, Pierre Moscovici, the EU’s economic affairs chief praised what he described as a “huge effort to restore public finances.” However, he warned Paris to keep up plans to reform the country’s labour market and welfare system commenting that the “ambitious reforms over the last year should be maintained.” The meeting comes a day after Moscovici presented plans to save an additional €18 billion from next year’s budget to the National Assembly in Paris.
There is nothing wrong with labor market reforms that reduce the influence of unions and make it easier for employers and employees to sign whatever contracts they want. France has one of the most heavily regulated labor markets in the industrialized world, and any step in the direction of deregulation is going to make a decisive difference for the better.
Strictly theoretically, there is nothing wrong with welfare reforms either. The problem is that the way the EU is pushing those reforms, they would be implemented at a point when the French economy is burdened with 10+ percent unemployment and punitively high taxes. When people are kicked out of welfare rolls, or receive dramatically less support from them, many won’t be able to find a job to replace welfare as income. That is a recipe for social unrest and political turmoil, as is alarmingly evident from the Greek, Spanish and Portuguese austerity experiences.
A far better way forward is to cut taxes proportionately to the reductions in welfare spending, and to cut the taxes in such a way that you maximize job creation. This will create a predictable, macroeconomically sustainable path from big, onerous government to economic freedom.
Sadly yet predictably, we won’t see any of that in the EU, especially not in France. Back to the EU Observer:
Rehn has had an uneasy relationship with French President Francois Hollande’s socialist government. Last month, the commissioner used an interview in the French media to warn Paris that raising taxes would “destroy growth and handicap the creation of jobs.” For his part, Hollande has accused the EU executive of attempting to “dictate” policy. The EU executive has also been frustrated by France’s failure to bring down its budget deficit below the 3 percent threshold laid out in the bloc’s stability and growth pact, giving the country a two year extension to meet the commitment in May.
Again, look at the steady upward trend in seasonally adjusted unemployment figures above. Who in his right mind thinks a government that is losing almost one percent of its taxpayers to unemployment every year would stand any chance at reducing its budget deficit? Then again, the Eurocracy is not populated with independent-minded people. It is staffed to the brim with bureaucratic yes-men.
To make matters even trickier for the French government, its new-found realization that taxes actually hurt the economy has led it to shifting its austerity policies over toward spending cuts. The EU Observer again:
Moscovici conceded that France would run a higher than forecast 4.1 percent this year, falling to 3.6 percent in 2014 and to 3 percent in 2015. Meanwhile, 20 percent of new budget savings in 2014 would come from tax rises with all savings coming from spending cuts in 2015. The government would also reform the pension system and cut labour costs to increase competitiveness, he said.
There are some strict conditions under which austerity biased entirely toward spending cuts could benefit the economy. However, those conditions are hard to meet and without elaborating in detail on them (I will at some point) I can safely say that France is far from meeting them.
Their ability to bring the budget deficit under control will be weakened further as they continue to try to balance their budget in the face of rising unemployment. You don’t need to go far to find evidence of where France is heading – just look at Greece.
I never thought I would see this in the news, but… from The Telegraph:
France’s Socialist government has admitted that the country cannot cope with any further tax rises and promised no more hikes just days ahead of the country’s largest ever tax bill. In an unfortunate piece of timing, however, the pledge came just as the environment minister announced the creation of a new “carbon tax” and amid reports that the overall tax pressure on French households will rise even further next year.
A socialist who admits that “the country cannot cope with any further tax rises”! This is indeed a day to commemorate.
But don’t we always hear from the statist camp that taxes are in fact good for the economy? And to the extent they admit that taxes may not be the best things since sliced bread – or even before that – don’t we always hear from them that the benefits of having government spend people’s money vastly outweigh any problems that taxes may cause? So what is the problem, Mon Seigneur Hollande?
Well, it is always refreshing when socialists have to admit that taxes are not the blessing of the world. Usually, though, the admission is not as blatantly open as in this case. The more common way for socialists to admit that they hate taxes is to cheat on their own tax bill. As we know from the first few years of the Obama administration, the left is full of tax cheats. The French socialist government came into office with the same problem.
This only goes to show that tax-to-the-max preachers are themselves very unwilling to live by their own teachings. Thus far, the French socialists have gotten away with their double standards, but as The Telegraph reports, those happy days are coming to an end:
Returning from their summer break, the French are about to discover stinging rises in tax bills in their letter boxes – the result of a series of new levies enacted by President François Hollande as he seeks to plug the French deficit and bring down public debt – now riding at 92 per cent of GDP. But the extent of the hikes has apparently even shocked the very Socialist ministers who implemented them. The total tax pressure (taxes and social security contributions) will account for 46.3 per cent of GDP this year – a historic high – compared to 45 per cent in 2012.
I wonder how they calculate these numbers. The standard Eurostat measurement reports total French government revenue at 51.8 percent of GDP in 2012. But be that as it may – a rise in taxes from 45 percent or 52 percent makes little difference. It is the trend upward that matters, and that is where the problems are for the Frog government.
With all the new taxes in mind it is bizarre to imagine that the forecasts from earlier this year of 1.4 percent growth in the French economy this year, and 1.7 percent in 2014, will ever come true. It is far more likely that the French economy will return to 0.7-1.1 percent bracket where it was stuck during the first years of the current economic crisis.
The Telegraph again:
Some 16 million households will see an automatic 2 per cent rise in income tax as calculations are no longer mitigated by inflation. Family tax breaks will be cut. The rich will see the highest rises, following Mr Hollande’s decision to raise the rate to 45 per cent for those earning more than 150,000 euros – effectively 49 per cent due to an additional levy. Amid discontent at the forthcoming rises,
The top Swedish tax rate is still effectively 60 percent, but I doubt that makes French entrepreneurs and high-earning professionals any happier.
In a clear damage limitation exercise, a chorus of top Socialists spoke out against any more rises. Pierre Mosovici, the finance minister, told France Inter radio: “I’m very sensitive to the French getting fed up with taxes We are listening to them.” Laurent Fabius, the foreign minister followed suit, warning Mr Hollande to be “very, very careful” as “there’s a level above which we shouldn’t climb”.
In all honesty, though, the only reason why they are not raising taxes even higher is that they don’t want to have to fight an election campaign for the next four years to the 2017 elections. The real question that France’s tax-greedy socialists should answer is: when is government big enough? The answer is obviously not “when taxpayers get really mad”. The real answer is embedded in their ideology and will tell us what will happen should the socialists win the next election as well.
Here in America, at least we have a counter-balance against the socialist in the White House. The Republicans in the House of Representatives have effectively stopped the Democrat pursuit of higher taxes. This together with the rising influence of the Tea Party movement on the Republican party has, as Cato Institute senior fellow Dan Mitchell reports, brought the Obama spending binge to a halt.
The French gasp over the higher taxes won’t bring the French government’s spending to a halt. All it will do is pause it for a couple of years. But in the meantime, we should definitely take the opportunity and smile a see-I-told-you-so smile every time we run into a statist. The reaction among France’s leading socialists is an excellent opportunity to once again expose the leftist tax-to-the-max hypocrisy.
Or how about this one from the same article by The Telegraph:
One Socialist told Les Echos newspaper that the hand-wringing was totally hypocritical as “they are crying wolf, but the wolf is us.”
The wolf indeed:
Mr Hollande’s government introduced over 7 billion euros of fresh taxes after coming to power in May 2012 and another 20 billion euros in the 2013 budget. In next year’s budget, the government says spending cuts will account for more than two thirds of the total deficit-reduction effort. But there will still be around six billion euros in new taxes.
It is a safe bet that there won’t be any spending cuts. After these draw-blood-from-a-stone tax increases, Hollande and his socialist cohort will have to fight tooth and nail to win the next election. As in every other welfare state, the safest way to get re-elected is to spend more money on key voter groups just in time for the election. By the same token, you don’t take away money from key voter groups just in time for the election.
Again, let’s enjoy the day. It will be a while again before we see such a blatant admission from a socialist that taxes don’t pave the way to heaven.
Is there a recovery under way in Europe? The EU Observer seems to think so:
The eurozone appears to be edging towards economic recovery, according to data published on Wednesday (24 July). Statistics firm Markit revealed that its purchasing managers’ index (PMI), which measures economic conditions based on data from thousands of companies, hit its highest level in 18 months in July. It rose to 50.4, up from 48.7 in June, driven by increased output from private sector companies in France and Germany.
That’s their indicator?? Don’t bet your house on that recovery. A one-time 3.5-percent rise in an index is not exactly a trend. It is small and unique enough to be a one-time blip, and its cause could be anything from an unusual variation in survey answers (who was on vacation in June?) to a temporary spurt in actual economic activity.
It is important to keep this in mind, because Europeans are craving for a recovery, and understandably so after five years of a destructive recession.
Back to the EU Observer:
It is the first time that the index has cleared 50, which marks the tipping point between recession and growth, since January 2012. Manufacturing data was particularly encouraging. Data from Germany, the bloc’s largest economy, indicated that the country’s traditionally strong manufacturing sector rose to 52.8 from June’s 50.4, the strongest reading since February this year. Meanwhile, France’s manufacturing sector also came close to posting growth, with a PMI of 49.8 (up from 48.4 in June), itself a 17-month high.
Another aspect of this is to look at what industries did well and what industries did not do so well. A clogged-up order book at Airbus could result in a growth in manufacturing at its plants and with subcontractors, large enough to register in aggregate data. This is especially likely if the rest of the manufacturing industriy stays flat or declines.
The news has prompted the Bank of France to project that the country’s economy grew by 0.2 percent in the second quarter of 2013, potentially bringing an end to its recession.
A zero-point-two percent growth in GDP is not a reason to bring out the champagne. According to Okun’s Law, an economy that grows at less than two percent per year is not making forward progress in terms of reducing unemployment and increasing the standard of living among its citizenry. Sad to say, inflation-adjusted French GDP growth from 2005 through forecasted 2014 averages a meager 1.2 percent. The 2014 forecast of 0.8 percent is actually lower than the forecast for 2013, according to Eurostat. This points to an extended, or renewed recession, not a recovery.
In addition, the French consumer is hardly a spendoholic these days. Private consumption is the most important driver behind economic activity, and with consumption growth forecast to 0.3 percent for 2013 and an overly optimistic one percent for 2014, there is no hope for a consumption-driven recovery.
If the PMI index continues to improve I will revise my forecast. As of now, though, I am sticking to my prediction that France is going to remain in a deep, rather depressing state of recession. And the French won’t be alone in their despair: the latest GDP growth analysis from Eurostat had Germany’s economy growing at one percent in 2012 while forecasting 0.3 percent for 2013 and one percent for 2014.
Again, as of today there are no signs of a recovery in Europe. Only faint hope glimmering like fireflies in the darkness of an economic wasteland.